Getting ready for Broadcom earnings with an options trade that minimizes risk
Broadcom (AVGO) , a leading semiconductor and infrastructure software company, specializes in designing and manufacturing chips for data centers, networking, wireless communications, and AI applications. As of Aug. 27, its stock trades around $300, reflecting a year-to-date gain of approximately 28%, driven by robust demand in the AI and cloud computing sectors. With fiscal 2024 revenue surging 44% to reach $51.57 billion and fiscal 2025 second-quarter fiscal at $15 billion, a 20% increase — the company demonstrates strong financial momentum. However, investors must weigh both optimistic and cautious perspectives in light of evolving market dynamics. The bull case for Broadcom stems from its pivotal role in the AI boom. Analysts continue to project that AI-related revenue will grow, driven in part by the reopening of exports to China and partnerships with hyperscalers such as Google and Meta. The company’s diversified portfolio, spanning semiconductors (contributing 56% of revenue) and infrastructure software, provides resilience. Earnings growth remains impressive; FY Adjusted EPS estimates of $6.65 represent nearly 152% year-on-year growth. The secular backdrop was the reason we suggested two possible positions ahead of earnings: either long stock with a low-cost collar, or a September 260 call, partially financed by the sale of the July 220/310 strangle for a cost of $18.66 ($1,866 per spread) — which we highlighted in June . Here’s what we said back then: “If you don’t own the stock, but are planning to buy it ahead of earnings, a call spread risk reversal will have characteristics similar to that of stock with a put spread collar. One may also consider extending the tenor of the long leg, turning the trade into a calendar spread as well, such as this example:” As we look back on this trade now, the July 220/310 strangle has of course expired, leaving only the long 260 call remaining which, thanks to the stock’s appreciation, is now worth about $44 ($4,400) per contract, or ~$2,530 in profits per spread. At this point, with earnings approaching next week, it makes sense to adjust the trade for a few reasons Because the September 260 calls are “in-the-money,” they are behaving much like the underlying stock, without offering much of a downside buffer if the AVGO gives back some or all of its recent gains. The “extrinsic” premium in those options will decay, particularly after the earnings release. Even good earnings results may be greeted, as Nvidia’s were, with a muted response. A lot of optimism has been baked into the AI trade, and it makes sense to reset the trade to create a buffer in the event of a pullback. The average move from the week prior to earnings through the two weeks following is ~10% over the past decade or so. Those moves have been considerably sharper recently, though. The expected move through the September expiration is about $32. I would first suggest rolling the September $260 calls up and out to the (nearly) at-the-money October $310 strike. This would take nearly $28 off the table, more than the original investment in the trade. If a trader did nothing else, they would be playing “with house money.” That said, a trader would reasonably be concerned with the “vol crush” that follows earnings, an effect that could be significantly mitigated by rolling the September long call to an October call/spread risk reversal (example below). This trade commits just over $5 to the new position. DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
